Broker snap: Nomura warms to Irish banks

Nomura Securities is prepared to take a chance on the battered Irish banking sector on the assumption that the government’s proposals for its bail-out vehicle, the National Asset Management Agency (NAMA), do not undergo significant changes before implementation.The Japanese broker has upgraded Bank of Ireland from ‘neutral’ to ‘buy’ and retained its ‘buy’ recommendation on Allied Irish Banks, which it regards as the riskier investment of the two, albeit the one that potentially offers the most upside.‘We believe that NAMA puts the Irish banks on the road to recovery by addressing both asset quality and funding concerns in one go. By the time the NAMA transfers are completed by mid-2010, we believe the Irish economy is likely to be in modest expansion,’ said Nomura analyst Raul Sinha.The National Asset Management Agency is being established to take over the Irish banking sector’s €77bn of toxic assets.The upgrade of Bank of Ireland (BoI) has been sparked by three ‘near-term catalysts’, Sinha said.First is that BoI’s NAMA-related assets are of ‘significantly better quality than the Irish average'’ which means the government will offer better terms for them.Second, BoI shares are among the most geared to available for sale (AFS) write-backs in the sector, in Nomura’s view. Third, Nomura believes BoI will be able to pay back the €1.5bn of government owned preference capital, which would cut the government’s stake from 25% to 15%.‘If it chooses to go ahead with the repayment, we see BoI's ordinary equity tier 1 ratio rising to c.8% pro-forma ahead of the NAMA related loan transfers and reaching a trough of 6.9% by 1H [first half of] 2010 post NAMA,’ the broker said.Bank of Ireland’s shares trade at just 5.2 times Nomura’s estimated earnings per share for the year to March 2013.Meanwhile, the broker believes ‘a significant amount of value within AIB depends on management action. Given that the group is engaged in a search for new management, we believe the appointment of a new CEO [chief executive officer] could be a positive catalyst for the shares which trade at 0.8x price to tangible book and 4.3x our 2012 EPS estimate,’ Sinha said.